STRATEGIC MANAGEMENT – LESSON 3

Internal analysis

In performing internal analysis a strategist’s main goal is to identify the truthful strengths and
weaknesses the company possesses. This main task is achieved through assessing competitive
advantage and distinctive competencies the company has.

• Competitive advantage

Competitive advantage grows out of positioning a firm in its competitive and industry environment
so that it has an edge in coping with competitive forces.

Many different competitive advantage exist: offering the highest quality product, providing the best
customer service, being the biggest firm in the market having the lowest prices, dominating a
particular geographic region, having the best product to meet the needs of a narrowly targeted group
of buyers, guarantying the highest degree of performance and reliability, and offering the most
value for the money (a combination of good quality, good service, and acceptable price) – to
mention some of the frequently used competitive edge possibilities.

Therefore, the strategist must look inside the company and find truthful answers to the following
two questions:

1. How has the company achieved this competitive advantage?

Efficiency

Quality

Innovation

Customer responsiveness

2. What is the durability of the competitive advantage – are there barriers to imitation?

• Distinctive competencies

The term distinctive competence refers to a skill or activity that the company does especially well in
comparison with rival firms. Distinctive competencies can be identify in the way in which the
company uses its:

Resources – financial, physical, human, technological, and organizational

and

Capabilities – company’s skills at coordinating its resources and putting them to productive
use.

Distinctive competencies in some competitively important aspect of creating, producing, or

marketing the company’s product or service can be vehicle for establishing competitive advantage
and then leveraging this advantage into better-than-otherwise business performance.

Based upon assessing the competitive advantage and distinctive competencies the strategist will
come up with strengths and weaknesses the company has.

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SWOT technique

SWOT is an acronym for a firm’s internal Strengths and Weaknesses and its external Opportunities
and Threats.

SWOT consists of a candid appraisal of a firm and is a quick, easy-to-use tool for sizing up a firm’s
overall situation.

Table below summarizes what to look for in performing the SWOT analysis.

Potential Internal Strengths Potential Internal Weaknesses

A distinctive competence?
Adequate financial resources?
Good competitive skills?
Well thought of by buyers?
An acknowledged market leader?
Well-conceived functional area strategies?
Access to economies of scale?
Insulated (at least somewhat) from
competitive pressures?
Proprietary technology?
Cost advantages?
Competitive advantages?
Product innovation abilities?
Proven management?
Ahead on experience curve?
Other?
Potential External Opportunities
Serve additional customer groups?
Enter new markets or segments?
Expand product line to meet broader range of
customer needs?
Diversify into related products?
Add complementary products?
Vertical integration?
Ability to move to better strategic group?
Complacency among rival firms?
Faster market growth?
Other?
No clear strategic direction?
A deteriorating competitive position?
Obsolete facilities?
Low profitability because…?
Lack of managerial depth and talent?
Missing any key skills or competencies?
Poor track record in implementing strategy?
strong Plagued with internal operating problems?
Vulnerable to competitive pressures?
Falling behind in R&D?
Too narrow a product line?
Weak market image?
Competitive disadvantages?
Below-average marketing skills?
Unable to finance needed changes in strategy?
Higher overall unit costs relative to key
competitors?
Other?
Potential External Threats
Likely entry of new competitors?
Rising sales of substitute products?
Slower market growth?
Adverse government policies?
Growing competitive pressures?
Vulnerability to recession and business cycle?
Growing bargaining power of customers or
suppliers?
Changing buyer needs and tastes?
Adverse demographic changes?
Other?

However, the SWOT needs to be more than an exercise in making four lists. Some strategy-related
strengths are more important than others because they count for more in the marketplace and in
executing an effective strategy. Some strategy-related weaknesses can be fatal, while others might
not matter much or can be easily remedied. Some opportunities may be more attractive to pursue
than others. And a firm may find itself much more vulnerable to some threats than to others. Hence
it is essential to draw conclusions from the SWOT listing about the firm’s overall situation and
assess the implications these have for selecting a strategy.

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 The Internal Factor Evaluation (IFE) Matrix

An Internal Factor Evaluation (IFE) Matrix allows strategists to summarize and evaluate the
major strengths and weaknesses in the functional areas of a business.

Similar to EFE Matrix, an IFE Matrix can be developed in five steps:

1. List internal strengths and weaknesses as identified in the internal-audit process. List the
strengths first and then the weaknesses.

2. Assign to each factor a weight that ranges from 0.0 (not important) to 1.0 (very important). The
weight indicates the relative importance of that factor to being successful in the firm’s industry.
Regardless of whether a factor is an internal strength or weakness, factors considered to have
the greatest effect on organizational performance should be assigned the highest weights The
summation of all weights assigned to the factors must equal 1.0.

3. Assign a 1-to-4 rating to each factor to indicate how whether that factor represents a major
weakness (rating = 1), a minor weakness (rating =2), a minor strength (rating = 3), or major
strength (rating = 4). Ratings are thus company-based, whereas the weights in Step 2 are
industry-based.

4. Multiply each factor’s weight by its rating to determine a weighted score.

5. Sum the weighted scores for each variable to determine the total weighted score for the
organization.

Regardless of how many factors are included in IFE Matrix, the total wighted score can range
from a low of 1.0 to a high of 4.0, with the average score being 2.5. Total weighted scores well
below 2.5 characterize organizations that are weak internally, whereas scores significantly above
2.5 indicate a strong internal position.

An example of an IFE Matrix is provided in next Table. Note that the firm’s major strengths are
its current ratio, profit margin, and employee morale as indicated by the 4 ratings. The major
weaknesses are lack of a strategic-management system, rising R&D expenses, and ineffective
dealer incentives. The total weighted score of 2.80 indicates that the firm is above average in its
overall internal strategic position.

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Factor Weight Rating Weighted
Score

STRENGTHS

1. Current ratio increased to 2.52 .06 4 .24

2. Profit margin increased to 6.94 .16 4 .64

3. Employee morale is high .18 4 .72

4. New computer information system .08 3 .24

5. Market share has increased to 24 % .12 3 .36

WEAKNESSES

1. Legal suits have not been resolved .05 2 .10

2. Plant capacity has fallen to 74 % .15 2 .30

3. Lack of strategic management syst. .06 1 .06

4. R&D expenses have been increased

31 percent .08 1 .08

5. Dealer incentives have not been

effective .06 1 .06

TOTAL 1.00 2.80